Accounts Payable (A/P) is a process employed by virtually every business in America. In its simplest form, A/P is the creation and distribution of a payment to settle an obligation (typically represented by an invoice) and the associated accounting entries to recognize the expense. While in small businesses A/P might be handled by an accountant or bookkeeper with ledgers or spreadsheets, A/P in larger businesses has evolved into a highly specialized application involving Enterprise Resource Planning (ERP) systems that link together previously disparate systems like Purchasing, Inventory, General Ledger (G/L), and Accounts Payable into a single, integrated system.
Using a manufacturing company as an example, Purchasing acquires the materials necessary to maintain targeted inventory levels in support the manufacturing process. To document the purchase, establish the exact nature of the items desired and their respective quantities, set prices, etc., a Purchase Order (P.O.) is created by the Buyer and is sent to the Seller either electronically or on paper. The Seller fills the order, completely or partially (in accordance with the requirements of the P.O.) and delivers the material(s) to the Buyer's designated location. Once received by the Buyer, the material is recorded in an inventory control system. The Seller, meanwhile, prepares and delivers to the Buyer an invoice that represents the amount due and payable in exchange for the materials provided. The Accounts Payable department of the Buyer compares the invoice to the original P.O. to ensure the purchase was properly authorized and to confirm that the terms on the invoice are consistent with those documented in the P.O. The A/P department also confirms through the inventory control process that the materials represented by the invoice have been received in a satisfactory condition.
If the invoice, P.O. and materials receipt records all match (a “three-way match”), payment can be remitted to the Seller. In the event that there are discrepancies in the match process (e.g., quantities or prices do not match, incorrect pricing, sales tax applied inappropriately, freight charges assessed, over shipment/billing, materials are unauthorized, items are billed but not received, etc.), the A/P department is responsible for researching and resolving the discrepancy.
Finally, the A/P department must classify each item on the invoice into its appropriate expense category for G/L posting. For example, in most businesses the costs for the inventory itself, the associated transportation/shipping charges, and any applicable sales taxes are recorded in different G/L categories even though they may all appear on a single invoice. This process exists in some form in virtually all businesses. In large businesses, it is automated significantly through specialized software or an integrated ERP system.
There are a number of challenges associated with managing the A/P process. Most notable, however, is the preponderance of paper that dominates the invoicing process. According to the Tower Group, there are some 14.5 billion business-to-business (B2B) invoices generated annually, and more than 95% of those are paper-based. Paper invoices are expensive according to the Institute of Management and Administration (IOMA), costing between $7 and $12 per item to administer through Accounts Payable. Taken together, these figures indicate a process that costs American businesses somewhere between $100 billion and $175 billion per year.
For most businesses, handling of paper invoices introduces accounts payable process costs in the following areas: mail receipt, invoice extraction and internal distribution; data entry of invoice information required for accurate G/L posting; and invoice retention.
Businesses have tried to address this challenge in several ways. Enterprise Resource Planning (ERP) systems can be very effective in linking together disparate systems (i.e. Purchasing, Receiving/Inventory, General Ledger) to facilitate the required 3 way match process (PO to invoice to receipt status). However, ERP systems do little to minimize the occurrence of paper invoices received within an A/P operation. Furthermore, the 3 way match process within the ERP environment occurs after all data has been entered into the system and is entirely dependent upon the quality of that data. Insufficient or inaccurate data will result in a flawed matching process and minimize the transactions that can be matched in an exact way. As a result, users very often resort to labor-intensive and costly manual intervention and queries to resolve data discrepancies and validate the match process.
Electronic Data Interchange (EDI) has enabled many companies to work with their trading partners to transfer purchase order and invoice information in an electronic format. While this process completely eliminates the traditional paper flow, adoption of EDI can be an expensive undertaking requiring integration resources and mutual (i.e. buyer and seller) acceptance of the required data formats. To date, market penetration of EDI data transfer is still low and prevalent in mostly large corporate trading relationships. Some businesses have resorted to imaging invoices upon arrival. While this solution does not mitigate the mail handling or data entry expenses, it does offer some improvement in internal distribution and storage. Other companies have chosen to outsource A/P processing altogether. In so doing, they can move the A/P process to a less expensive location with less expensive labor, but the process remains largely unchanged.
Electronic Invoice Presentment and Payment (EIPP) is, as its name suggests, targeted specifically at automating the processes of invoice delivery, review, approval, dispute resolution and payment generation from the Biller's perspective. However, EIPP has thus far been ineffective in addressing concerns of the accounts payable manager for a variety of reasons. Because most EIPP solutions are biller-centric, they have relatively limited built-in functionality for the A/P manager. More importantly, EIPP has not penetrated the invoice market because it represents a significant behavioral and/or systematic change for both the Buyer and the Seller. Even the best solutions, if not embraced by the majority of the potential users, will struggle to overcome the additional burden of being a processing “exception” in a world that favors standardization and consistency.
Finally, some companies have chosen to convert paper invoices to electronic transactions by data entering them prior to their introduction into the A/P process. While promising, this solution has several drawbacks. There is no known, reliable method to validate the data entry that is being done outside of the A/P process other than a manual, key verification process. Key verification, or duplicate keying, doubles the number of keystrokes required and significantly slows data entry while increasing costs. Given the large number of keystrokes required to convert a paper invoice into an electronic one with sufficient detail to allow G/L posting, key entry has generally proven to be impractical.
What is needed is a reliable, cost-effective method of converting the information contained in a wide variety of paper invoices into a uniform electronic format with sufficient detail to enable A/P processing and facilitate the three-way match.